Terra Incognita: Rethinking the global economy in 2012
By SETH J. FRANTZMAN
The economic forecast for this year isn’t all bad, but there are definitely changes in the air.
For some reason financial “experts” are predicting a good year in 2012. Wall Street strategist Brian Belski and Standard and Poor’s analyst Howard Silverblatt predict that stocks will rise about 10 percent. Everywhere are headlines like “pros see stocks rising in 2012” and “analysts see stocks climbing in 2012.”
That is all well and good except, as Bernard Condon at the Associated Press notes, the “experts” also predicted gains in 2011. It is worthwhile looking back over the past year to get an idea of what may be in store for next year’s global economy.
The Dow Jones Industrial Average, a gauge of the US financial market, is ending the year almost precisely where it started, at around 12,000 points. European and Asian markets generally had a worse year than New York’s stock exchange. US financial markets have recovered since the disaster they suffered in 2008, which was a long-term result of a sub-prime mortgage crises.
It turns out 2011 was a relatively good year for US home sales, which were up 7% in November. That means more people are buying homes, but the price of real estate has not changed, and has actually continued to decline, albeit slightly. The spike in home sales has been fueled by record-low interest rates: Wells Fargo, a major bank, estimates that a 30-year fixed-rate loan, which is a typical type of home loan, will come with a rate as low as 3.875%.
IF THE US economy seems to have weathered the storm in 2011 and recovered from many of its problems, it is no secret that the world’s real economic problems are in Europe. All of 2011 was overshadowed by discussions about Greece defaulting on her debts or leaving the Euro, plunging markets into chaos again and again.
The EU response has been tepid, as Germany and France, the largest economies, wrestle with possible solutions. Some fears have been allayed with news that Italy’s borrowing costs declined to 3.2% when it raised $11.8 billion in late December. Borrowing costs are a measure of volatility, so the fact that Italy is paying less interest is a sign that investors feel there is less risk of an Italian default.
In November, an auction of Italian bonds had forced the country to pay upwards of 6% to raise money. It was because of this that Italy was said to be the “next Greece” with fears that financial contagion would spread from Italy to Spain and Portugal and from there to the gates of Paris and Berlin.
However, Europe’s economy still suffers from other issues. The first is that the European Union has become more ham-handed in its regulatory behavior. In one instance it denied the right of mineral water makers to claim their products guarded against dehydration. In slapping record fines on Intel and Microsoft several years ago, it proved itself to be wary of foreign innovation and fearful of penetration of its markets.
In another case the EU continues to provide subsidies to Airbus, against a decision by the World Trade Organization. In that dispute the US has asked the WTO to impose trade sanctions of up to $7b. annually on the Europeans. Over-regulation and protectionist trade policies will hamper the continent’s long-term prospects, rather than protecting European consumers.
More worrying was Germany’s decision to to scrap its nuclear power stations. Nuclear power is the clean innovation of the future, a 20th-century technology that is perfect for the 21st century’s interest in clean energy. But the tsunami in Japan led to widespread irrational fears, and nuclear power is being rolled back. In the end this will be a long-term disaster for Europe and other places, as economies continue to rely on fossil fuels.
In thinking about fossil fuels it is important to recall that oil prices increased due to the Arab Spring, falling back to the $90 a barrel price range in the fall before climbing again to $99 a barrel in December following Iranian threats to close the Straits of Hormuz if sanctions are imposed. It should be recalled that the Iranians attempted something similar in 1984, with limited success, during the Iran-Iraq war.
Because of turmoil in the Arab world the oil fields in Iraq and Libya remain threatened and the Iranian problem casts a shadow over the future price of oil. At the same time the West’s dreams of electric car technology are not being realized. Only 6,142 Chevy Volts were sold in 2011 and only 8,720 Nissan Leefs. By contrast 11,375 Ford Focuses were sold in just November 2011.
This year is going to see several continuing trends. The “occupy” movement and various populist anti-capitalist protests will remain. At the same time the “second world” will continue to outpace the first, with the rise of the Chinese Yuan to record levels and reports that the Brazilian economy has overtaken that of the UK. Interest rates will remain high in Europe and the US dollar will remain pressured by the fact that US has no good plan to repay its deficit or balance its budget.
The good news from 2011 is that despite economic jitters related to the Euro the world economy continued to improve. The bad news, however, is that the long-term structural problems associated with European monetary integration and US debt issues have not been resolved.
The writer has a PhD from the Hebrew University and is a fellow at the Jerusalem Institute for Market Studies